A Quick Guide to Buying a Business

A Quick Guide to Buying a Business
  • You can buy a business’s assets or buy a company, and each has their own process and requirements.
  • The completion/settlement date is the day when ownership changes over, so things such as stock, IP, lease, key contracts and staff need to be sorted out before that.
  • Consult or hire a business broker or lawyer who can guide you every step of the way.

If you want to become a business owner, one way to do so is by buying an existing business.

You may consider purchasing a business because it is doing very well, and you would like to continue to grow it to achieve a bigger success. Or you may be contemplating a business that isn’t doing well but in which you see a great deal of potential.

Whatever the underlying reason behind your desire to buy an existing business, there are several key things to consider before doing so. The process for buying a business can also be new to your, and often complicated, so it is important to understand the process of buying a business and your next steps.

Methods for buying a business

When you are purchasing a business, you can typically do so in one of two ways. You can either: 

  • purchase the business (being its assets); or
  • purchase an existing company.

Importantly, if you just purchase a business’s assets, this is not considered to be a business sale (and will not be covered in this article), unless you are buying the business as a ‘going concern’. A going concern is when you buy a business that you intend to operate in much the same way as it operated before you bought it.

This has tax consequences, as the sale and purchase of a business as a going concern is not usually subject to GST. If you purchase the assets without planning to continue to operate the business, this is usually not considered the sale of a going concern. 

Method 1: Buying business assets and liabilities 

The purchase price consists of the assets and goodwill that the buyer and seller have agreed should be included in the sale.

When you buy a business, you are purchasing the business’s assets, which typically include the stock, goodwill and other assets, such as:

  • contact numbers
  • websites
  • machinery
  • intangible assets such as intellectual property
  • business name

As the buyer, you do not automatically become responsible for the liabilities. Any existing liabilities rest with the seller and do not move across to you. If the business has employees, and the buyer wishes those employees to continue, the employees usually cease employment with the seller at the time the sale is completed and commence employment with the buyer at that same time. Technically, they are commencing new employment and the employees need to be formally employed by the buyer, and to sign new employment agreements. 

Method 2: Buying a company

When you buy a business that is a company, you are purchasing the actual entity that runs the business. This involves transferring the company’s shares into your name as the purchaser. Since a company is a separate legal entity, it will continue to exist and operate in the same manner as it did prior to the sale but with a new owner. It generally continues to carry on its business in the same way as before, just with new ultimate ownership.

Rather than the business’s assets being sold to a new owner, everything that the company currently owns (which includes all its assets), stays with the company. The title to the assets does not need to be changed and everything that the business currently does, continues with the company, unchanged. 

Note: this also means that the buyer will take on any of the current liabilities.

More importantly, when a company is bought and sold, even though the legal party to the business’s contracts and agreements remain unchanged, many of these types of agreements provide for a change of control clause. Such a clause typically states that, if the ultimate control of the company changes, then the other party will need to be notified and the agreement may be renegotiated or terminated. This may be relevant for contracts with key suppliers or customers, and usually applies to leases as well.

How to buy a business

The steps involved in buying a business differ depending on whether you are purchasing the business, or the underlying company. Many of the steps are largely the same, with a few minor distinctions between the process and documentation required. 

The key steps are: 

  • research the financial and legal position of the business you wish to acquire;
  • agree key terms;
  • undertake contracts/legal documentation; 
  • negotiate the terms; 
  • sign the documentation (including paying deposit); 
  • undertake pre-completion obligations;
  • settlement/completion; and
  • fulfil post-completion obligations.

Legal Documentation

Once you have found the right business for you, you will often prepare a Term Sheet or Heads of Agreement. The term sheet is a short-form document, usually a couple of pages, which sets out the key terms of the proposed sale.

A term sheet typically contains key details, such as:

  • the buyer and seller entities;
  • the purchase price;
  • what is included / excluded from the sale; and 
  • other key terms, including any conditions that need to be satisfied for completion to occur. 

Once a term sheet is finalised, the parties then progress to prepare the full-form legal documentation to implement the transaction. This documentation, usually a contract, is a legally binding agreement that sets out both the key commercial terms and the legal terms of the sale. 

Usually, the seller’s legal representatives prepare the documentation, however, it can also be the buyer’s, if appropriate. 

  • When you are buying a business that’s not a company, the agreement would be a Sale of Business Agreement
  • When you are buying a company, it would be a Share Sale Agreement. 

These agreements outline the terms of the sale and the mechanics which are necessary for the sale to occur. They include details of: 

  • the parties
  • the purchase price
  • intended completion date
  • included / excluded assets (in the case of a business sale)
  • any conditions that need to occur both before and after completion
  • training obligations and / or trial periods
  • due diligence period
  • warranties / liabilities
  • restraint of trade provisions
  • confidentiality

Once the legal documents are prepared, the other party (usually the buyer) will then have their legal representatives review and negotiate the contract. When both parties are happy with the agreement’s form, they sign the agreement and subsequently proceed to settlement/completion. Usually, a deposit is payable by the buyer to the seller’s representative when the contracts are signed. A typical deposit is 10% of the total purchase price but may be a different amount as agreed between the buyer and the seller.

Completion/Settlement

Completion or settlement is the date on which the business transfers from the buyer to the seller. Starting from the completion date onwards, the buyer becomes the owner of the business and the seller simultaneously ceases to be the owner. There is usually a time period between signing the agreements and the completion date allowing each party time to get their affairs in order and to prepare for the transfer of ownership.

By the completion date, each party needs to satisfy their respective obligations in relation to the sale and purchase. This may include:

  • the buyer obtaining finance (if necessary);
  • arranging for either an assignment of an existing lease or a new lease of any property used in the business; and 
  • the buyer being satisfied with its due diligence and/or trial period, among others.

On the completion date, there are several items that need to occur, including the seller handing over anything that the buyer needs to take over the business, such as keys, login details for software/social media accounts, etc. 

When you’re buying a company, the shares need to be transferred to the buyer. This involves:

  • executing a share transfer form;
  • updating the company’s register of members and directors; and 
  • notifying ASIC that the transfer has occurred. 

The company also needs to pass the appropriate shareholder and member resolutions, to approve the transfer. These documents should be prepared ahead of the completion date and should be reviewed and finalised so that they can simply be executed by then.

Stock

When the purchase is a business purchase, it is typical for a stocktake to occur the day prior to settlement. A stocktake usually occurs where the buyer is purchasing the business’s assets, but the value of the business’s stock is payable on top of the agreed purchase price.

A stocktake involves the buyer and the seller agreeing on a maximum value that the buyer will pay in addition to the purchase price for the stock. The buyer and the seller then conduct a stocktake where they value the stock on-hand and the buyer pays for that stock, up to the maximum value.

Lease

If the business operates under a lease of a premises, the buyer will need to enter a lease with the landlord to continue to use those premises. This can either be done by the buyer entering into a new lease with the landlord, or through an assignment of the existing lease to the buyer. 

  • A new lease involves the buyer and the landlord executing a fresh lease on terms agreed between them.
  • An assignment involves the buyer taking over the seller’s existing current lease. 

In either case, the buyer will need to liaise with the landlord to provide them with appropriate documentation and any other information or requirements that the landlord may request from the buyer, in order to grant the buyer a right to the lease.

Employees

In a business sale, employees transferring from the seller to the buyer must have their employment terminated with the seller and start new employment with the buyer. The buyer will need to make an offer of employment to the employees it wishes to employ after settlement.

This offer usually needs to be made on substantially the same terms as their existing employment with the seller. The seller will usually pay out any outstanding employee entitlements (such as annual leave entitlements) prior to, or on, the completion date.

Key contracts

In a business sale, any key contracts with third parties need to be transferred to the buyer. The transfer involves the seller assigning these key contracts to the buyer, which usually requires the relevant third party’s consent. If the contracts cannot be assigned, then the buyer will need to enter into new agreements with the third party.

Meanwhile, if you’re buying a company, the contract itself need not be assigned.  However, the third party’s consent may still be required for the company’s change of control.

Intellectual properties (IP)

In a business sale, the business’s intellectual property will not automatically transfer to the buyer unless it is included in the sale’s assets. Common IP that a buyer purchases includes:

  • business name
  • trademarks
  • contact details
  • websites
  • social media accounts

The sale of business agreement should clearly state which IP is being transferred to the buyer. Depending on the IP that is being transferred, certain steps may need to be taken in order to facilitate the transfer.

For instance, when transferring a business telephone number, speak to the telephone service provider. The seller will need to ensure that these items being transferred are set to transfer at settlement, so they will need to liaise with the relevant government entities, service providers, etc. prior to settlement to ensure that this occurs.

Purchase price

On the completion date, the buyer pays the balance of the purchase price to the seller. Any deposit that the buyer has paid is released to the seller on settlement.

For a business sale, the purchase price balance needs to be adjusted at settlement, to take into account any pre-payments that have been made by either party that fall into the post-settlement period. Typical payments for which the purchase price will be adjusted include:

  • rent;
  • outgoings; and 
  • employee entitlements. 

Using rent as an example, if the seller has pre-paid rent for the whole month but settlement occurs mid-month, the purchase price will be adjusted in favour of the seller, so that the buyer pays an additional amount to the seller to account for the two weeks of rent the seller has paid for beforehand.

Conclusion

When buying a business, there are a few aspects to consider before your purchase can be finalised that will affect what you take over as the buyer. For instance, whether you buy the business by its assets or shares.

There are also important steps involved with purchasing a business, including preparing the relevant agreement, negotiating the terms of the sale and proceeding to settlement. The process of buying a business can be difficult to navigate. It is worth engaging a professional business lawyer to protect your interests and ensure you can grow the business successfully.


Maya Lash

Lawyer at

Maya is a lawyer in LegalVision's Corporate, Startups and Capital Raising team. She provides advice and assistance to businesses with a wide range of legal needs, and supports clients through all stages of their business, from the initial set-up and structuring phase through to exits.


Questions
Anonymous asks
Comments
User
Loading...